QINGDAO, China The Chinese businessman who built the world's second-biggest refrigerator, washing machine and air conditioner empire is putting big overseas acquisitions in the deep freeze, to focus on innovation and connectivity - linking his firm and its customers to their smart home appliances.

Zhang Ruimin, the 66-year-old CEO of Haier Group, said global over-capacity and a shift to advanced manufacturing in a wireless age has put off talk of large acquisitions.

In recent years, Haier has bought New Zealand's Fisher & Paykel Appliances and Japan's Sanyo Electronics to compete against worldwide home appliances leader Whirlpool Corp (WHR.N) and other global brands, including Electrolux AB (ELUXb.ST).

"We used to think: maximize quantity, export more and manufacture more. This isn't working," Zhang told Reuters in an interview at his Qingdao headquarters.

He is now driving production and sales at one of China's most successful consumer brands closer to customers, flattening the management structure and streamlining the workforce, in a battle to maintain profitability as China's growth slows.

"It's survival of the fittest," said Zhang. "(Haier) must transform from a traditional manufacturing enterprise into an Internet business."

Haier, which includes Hong Kong-listed Haier Electronics Group (1169.HK) and Shanghai-listed Qingdao Haier Co (600690.SS), has shed 10,000 workers - around one seventh of its workforce - in the past year, while building out China's biggest home appliance sales and logistics network.

Haier Group sales rose 11 percent last year to $32.6 billion, and net profit jumped by almost a third to $1.9 billion, but net margins at Haier Electronics remain thin, at around 3.6 percent, and a weak property market and slowing appliance sales are squeezing profitability.

Zhang told Reuters last year he wanted to double the contribution of worldwide sales to 50 percent of revenue. "The goal hasn't changed, but what's important is that we've come to realize the path has problems," he says now.

The Haier chief has brought home all the Chinese executives from 24 worldwide production locations, leaving local managers in charge. "We found that when we sent people, they were always using Chinese thinking to manage overseas," he said.

"We were using Chinese recipes to make western food."

SMASHING EXPECTATIONS

Haier's success has been as unexpected as Zhang's emergence as a national industrial leader. A native of China's northeast Shandong Province, Zhang was a township official when he was appointed to head Qingdao Refrigerator Factory in 1984 - then a collective enterprise with 800 workers and 1.47 million yuan in debt, a huge sum at the time.

"We didn't have a penny, we were losing money, and we couldn't pay wages," Zhang said. "Every day was perilous."

Zhang soon famously picked up a sledgehammer and passed it among his workers, telling them to publicly destroy 76 defective refrigerators. His message was clear: quality and brand were the way forward. Today, the sledgehammer sits in China's national museum in Beijing.

A ferocious appetite for change has made Zhang a guru at management schools from Harvard University and MIT to IMD in Lausanne, Switzerland and Japan's Kobe University.

Over more than three decades, Zhang has led Haier through five major transformations, most recently slashing middle management in favor of 2,000 self-managed teams, many of which have become start-up micro-enterprises seeking to create independent affiliated companies.

He has also attracted investment from Alibaba (BABA.N), KKR & Co (KKR.N) and The Carlyle Group (CG.O), which sold its Haier Electronics stake in April, after the shares gained more than 160 percent since they were bought in 2011. The stock has since shed about 12 percent of its value. [ID:nL4N0XC3ZH]

'SMART' FACTORIES

Haier is applying advanced manufacturing to mass produce customized appliances that can be ordered online from four 'smart' factories. It is developing an app that will allow customers to watch their products being made on a live video feed.

The ultimate aim, Zhang says, is for Haier to become a full services company for the wireless age, where customers place orders for tailor-made appliances, and communicate directly with their home appliances via smartphone or controlling device.

Last year, Apple Inc (AAPL.O) announced that Haier was among the first home appliance makers it partnered with for its smart home platform.

While Zhang is pausing big offshore buys, Haier is still pushing ahead with global investments, adding production lines in India, and last month offering to buy an industrial site in Wroclaw, Poland, which could become a manufacturing hub for the European and Russian markets.

"Zhang is a CEO with tremendous foresight," said Michael Cusumano, professor at MIT's Sloan School of Management. "He's not just sitting back trying to crank out refrigerators. He's trying to think about what the company can become."